“In Spain, investors are shifting their attention towards secondary markets”
Prime Yield’s newest research “Keep an Eye on the NPL & REO Markets” is focusing on the NPL & REO trading potential in Portugal, Spain, Greece and Brazil. We had the chance to talk to Nelson Rêgo, Managing Director of Prime Yield about the developments in the named markets in 2018.
How has the NPL market in Spain developed in 2018?
During 2018, the Spanish Non-Performing Loans (NPL) market was very active with the sales of secured portfolios. By doing so, it entered into a more mature stage in which investors are shifting their attention towards secondary markets, anticipating a great momentum in securitization transactions for 2019 and contributing to accelerate the bad debt adjustment process.
Over the last two years, there was a sales rush in the Spanish market, with Prime Yield estimating a total sales value of around €90 billion. This figure includes not only the deals that were completed in 2018, but also those agreed over the year but due for completion during the first half of 2019.
And what about Portugal?
2018 was a landmark year for the Portuguese NPL market, marking the beginning of a new stage of increased activity. After two years in which the average sales volume was set at around €2 billion, it is exceeding even the highest expectations. The Portuguese NPL & REO sales moved fast in 2018 and hit a new record high of more than €7 billion – an unprecedented milestone for the country. Today, Portugal’s NPLs are well on the investor’s radar. With an increasing number of players landing in the market looking for returns only less mature markets could offer, more and more transactions are to be expected in 2019.
Why has the NPL market in Greece started to significantly emerge in 2018?
We believe that the increase in sales has mostly come from the strict regulatory obligations and capital requirements set by Basel III, Solvency II and IFRS 9, as well as from the increased trust by investors. Bank of Greece’s focus in tackling the issue of NPL’s has also played a great role in the creation of a necessary set of tools launched in 2014 and followed up until recently by relevant amendments. Today, that legal framework is mostly set and the market is also maturing at a fast pace.
According to data provided by the BoG, the targets set by the banks to reduce their NPLs were met both in 2017 and 2018. This is definitely credit-positive and lays the groundwork for a further decrease in their NPL and NPE ratios, enabling banks to increase their financial performance and release capital to fund productive economic sectors. That prognosis does require, however, economic growth.
Why would you say did it take so long?
The restructuring process of Greek banks in 2015 set the foundations to deal with a volume of NPLs that kept growing up until 2016, when there was an 11% year-over-year increase compared to 2015. Increased pressure by the ECB and the ESM also forced the four Greek systemic banks to seriously consider selling NPLs. Those banks were largely unprepared to manage them back then, but 2016 marked a shift in their willingness to deal with the NPL issue. The legal framework did not yet exist back then and it took too long as the negotiation between the government and the Troika stalled. But finally, certain structural impediments were lifted, thanks to out-of-court procedures and the auction platform, among other factors. Furthermore, only 4 servicers managed to obtain a license by 2016, an issue fixed by the new institutional framework, which paved the way for the current 17 servicers in the market and the additional 10 in the process of obtaining one.
What are still the main obstacles in the Greece NPL market?
To name a few, the slow and complex legislative procedures, limited out-of-court procedures and taxi anti-incentives, the electoral cycle, the many complexities of active NPL management, and also the fact that the market is not yet fully opened due to the asymmetric flow of data between buyers and sellers.
“2018 was an exceptional year for NPL sales in Brazil”
How far along is the Brazilian NPL market?
The Brazilian NPL market now offers excellent conditions to a power take-off in trade activity. The country is still an emerging market despite its increased professionalization, the economic forecasts are promising and banks seem more open to put products up for sale, paving the way for increased attention from international investors looking into large-scale portfolios and high
returns. 2018 was in fact an exceptional year for NPL sales in Brazil compared to the previous two years, with estimates pointing out to R$40 to R$50 billion in trading if we consider both closed and ongoing deals. And since demand and supply are lining up to be more active in a largescale market, NPL sales are set to scale-up considerably in the coming years.
Some experts claim that 2018 may have been the peak year for NPL sales in Europe. They say that investors are already seeking new opportunities, both in terms of types of asset on the market as well as different countries. Would you agree or disagree?
I totally agree, and it is important to point out that investors are taking advantage of the wide range of available opportunities not only in Europe, but also in Latin America. The Spanish NPL market is at a more mature stage. Furthermore, it is now clear that Portugal’s NPL and REO market is finally recognized as one of the most promising in Europe, offering very interesting opportunities for investors from around the world. As for Brazil, the market is becoming more professional. Several specialized servicing companies have already announced their plans to be active buyers of portfolios, and banks are also admitting that NPL sales are crucial for their recovery.
Thank you very much for your time, Nelson.